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RANDOM ACCESS
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Understanding the Standing Committee
Why did they reject the draft fiscal rules?
Ajit Ranade
Dear Mr Chairman,
We were utterly dismayed when your committee chose to reject
all the numerical targets and the time-table for reducing the
fiscal deficit, outlined in the draft text of the Fiscal Responsibility
and Budget Management Bill. After all, the FRBM was referred
to your Parliamentary Standing Committee on Finance, instead
of being debated in the two houses of Parliament, presumably
to generate a sufficient prior consensus and to thrash out technicalities.
The Standing Committee of which you are the Chairman, consists
of 43 members (15 from Rajya Sabha, and 28 from Lok Sabha).
Your members hail from various political parties representing
a broad spectrum of views and expertise. Your committee has
also recognised that “fiscal discipline is the sine qua non
for sustainable economic development”. So we expected a rational
and logical approach. And yet you have rejected all the numerical
targets, the time-table, and also the blanket ban on borrowing
from the RBI. Why were you so totally opposed to numerical targets?
You have said the targets were not pragmatic and hence unattainable.
You have also said that binding the hands of the government
might not be in the best interests of development. Such rigidity
(of numerical targets) in the decision making process deprives
the government of crucially required flexibility, especially
to deal with unforeseen exigencies. And you also say that putting
budget caps into law, exposes the budget process (essentially
a prerogative of the legislature) to litigation and hence judicial
control.
But these reasons are not convincing. As you know, the world
over, macroeconomic policy is becoming rule-based. For monetary
policy the rules are about inflation targets, and for fiscal
policy the targets are about the size of the deficit or debt.
Discretionary policies (instead of rules) don’t work well in
a democratic setup. The finance ministry experts’ report which
you consulted, clearly says that we have a systemic deficit
bias in our fiscal policies. This is because the benefits of
targeted spending accrue to a target group today, but everyone
in the future shares the costs in terms of higher taxes or lower
spending. The burden sharers are too diffuse (or they are not
even born today.) And only when the debt becomes very high is
there talk of fiscal stabilisation. That report also says that
any fiscal responsibility act would lack credibility without
some normative ceilings or time-frames for fiscal indicators.
Many countries have already adopted such fiscal rules. And those
rules are often flexible enough to allow for some discretionary
spending during times of distress. So there are strong theoretical
reasons as well as precedents for India to impose fiscal rules.
But if your excuse is that India is different from all those
countries, you could be more right than you think. India is
different because her combined deficit is among the highest
in the world. And hence her need for a fiscal discipline law
is urgent.
Fiscal rules, which control the inherent deficit bias help create
a de-politicised framework for fiscal policy to operate. Debates
on spending and tax priorities then take place within the constraints
of a balanced budget or spending limits. If you add transparency
to fiscal rules this becomes a recipe for gaining a strong international
reputation so useful in today’s financial markets. And another
benefit is that these rules can also be adopted by state governments
(in fact some states have already embarked on their own fiscal
austerity programme).
Of course you might say that fiscal responsibility legislation
should be enacted during a declining deficits phase. Then the
momentum of surpluses can be exploited to successfully push
a fiscal discipline law.
But unfortunately we cannot wait, and without a law we don’t
seem to be inching towards operating surpluses. You also might
rightly argue that our real problems are on the revenue front
and not on spending. Tax to GDP ratio is stagnating and no doubt
needs revitalising. But we don’t think that expenditures have
been cut to the bone, and in any case the quality of spending,
if not quantity, certainly deserves scrutiny. You might also
argue that we have taken small steps in the direction of fiscal
discipline, by abolishing issue of ad hoc treasury bills by
the RBI, or by a shift to a more market determined interest
rate on government debt, or in the establishment of the Expenditure
Commission. But Mr. Chairman, all this is no excuse for evading
numerical targets on deficits and a real time-frame. In fact
you do know, that for the past four years interest payments
and borrowings, as components of the Union budget have been
going neck-to-neck. Just shows, that if there were no interest
payments to be made, there wouldn’t be a need for any deficits!
And this needs a mandatory ceiling on the size of the debt.
So we hope that when the FRBM gets to Parliament, as the minister
plans to do, you and your colleagues will have a rethink about
accepting numerical targets. Yours truly,
Ajit Ranade is Chief Economist, ABN Amro Bank, India |
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